The recurring payments landscape is evolving rapidly. While traditional card payments have long dominated, Variable Recurring Payments (VRPs) powered by Open Banking are emerging as a cost-effective, secure, and flexible alternative. For businesses managing recurring payments, understanding the differences between these methods is critical for making strategic decisions.
The shift from traditional payment methods to VRPs represents more than just a technological upgrade – it’s a strategic move towards more reliable, cost-effective, and customer-centric payment collection. For financial services businesses managing recurring payments, understanding this comparison is crucial for optimising revenue collection and reducing operational overhead.
This blog explores VRPs and card payments, comparing their costs, efficiencies, and customer experiences to determine which delivers the most value.
What Are Variable Recurring Payments (VRPs)?
VRPs enable businesses to collect recurring payments directly from customers’ bank accounts under pre-set parameters, such as amount and frequency, without requiring re-authentication for each transaction.
How VRPs Work
- Customer sets up consent: The customer approves a VRP mandate through their banking app, agreeing to limits such as maximum amount, frequency, and duration.
- Business collects payments: Once consent is in place, the business can initiate payments on demand within those agreed limits — no need for the customer to approve each payment.
- Customer stays in control: The customer can view and manage the agreement directly from their banking app at any time, giving them full transparency and control.
Types of VRPs
- Sweeping VRPs: Automate “me-to-me” transfers, such as moving funds to savings or preventing overdrafts.
- Commercial VRPs: Handle “me-to-business” payments, ideal for utilities, subscriptions, and financial services.
What About Card Payments?
Card payments use the card-on-file model, where customer payment details are tokenized and stored securely for recurring charges. While familiar and widely accepted, card payments come with challenges like high costs, payment failures, and security risks.
Cost Comparison: VRPs vs Card Payments
- VRPs: Lower costs due to reduced chargebacks, fewer payment failures, and minimal fraud prevention needs.
- Cards: Higher costs for fraud prevention, chargeback management, and PCI DSS compliance.
Key Benefits of VRPs
- Reduced Fees: Bypass Scheme and Interchange fees.
- Security: SCA and direct bank connections eliminate the need to store sensitive payment credentials.
- Real-Time Processing: Faster settlement improves cash flow and financial visibility.
Challenges with Card Payments
- High Costs: Percentage-based fees add up for high-value transactions.
- Payment Failures: Issues like expired cards and insufficient funds lead to disruptions.
- Security Risks: Storing card details increases data breach risks.
- Chargebacks: Disputes create revenue loss and administrative overhead.
Customer Experience: VRPs vs Cards
- VRPs: Customers can set up payments seamlessly without entering card numbers, expiry dates, or CVV details. This eliminates manual data entry, reduces the risk of failed payments, and creates a smooth experience from setup through to ongoing transactions.
- Cards: Familiar but prone to issues like expired cards and payment declines, leading to customer frustration.
The Future of Recurring Payments
With VRP transactions growing to 393% over the last 2 years, businesses adopting VRPs early can gain a competitive edge. While card payments remain popular for low-value transactions, VRPs offer lower costs, better success rates, and enhanced customer experiences, making them the future of recurring payments. The choice between VRPs and traditional payment methods ultimately depends on business specific requirements and customer demographics. However, the evidence clearly favours VRP adoption for businesses prioritising cost reduction, payment reliability, and customer experience enhancement. Financial services businesses, in particular, may benefit from VRP capabilities due to their recurring revenue models and sophisticated customer bases. The desire for lower costs, higher success rates, and enhanced flexibility makes VRPs particularly attractive for insurance premiums, loan repayments, and subscription services.
VRPs don’t necessarily require abandoning existing payment methods entirely. Many businesses find success in offering VRPs alongside traditional options, allowing customers to choose their preferred payment experience whilst benefiting from improved collection performance overall. The payment landscape continues evolving rapidly, but the fundamental advantages of bank-mediated transactions – security, reliability, and cost-effectiveness – suggest VRPs will play an increasingly central role in recurring payment strategies. Businesses evaluating their payment infrastructure should seriously consider VRP integration as part of their future-focused payment strategy.
Conclusion:
For businesses seeking to optimise recurring payments, VRPs provide a secure, cost-effective, and flexible solution. By adopting VRPs now, you can reduce costs, improve customer satisfaction, and future-proof your payment strategy.
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